IRAs Flashcards

Question

What is the tax treatment of a joint IRA?

Answer 1

There are no joint IRAs, each tp, husband & wife, have their own individual IRA.

Answer 2

If one sps works, and the other sps does not work, if the working sps has sufficient earnings, a contribution can be made to an IRA owned by the nonworking sps, (only if they file MFJ).

Answer 3

Their combined IRA contribution limit is their combined qualifying compensation. Note: They can split the combined contribution between their individual IRA accounts in any way they want.

Answer 4

Yes - A tp of any income level and covered by a retirement plan at work may still contribute to a traditional IRA, but the contribution may not be deductible.

Answer 5

Form 8606 - Non Deductible IRAs. If a tp make a nondeductible contribution to a traditional IRA he must attach it to his return so he can establish basis in his IRA.

Answer 6

If a tp does not report nondeductible contributions to an IRA properly (Form 8606) then all future withdrawls from his traditional IRA may be taxable, (unless he can prove with evidence that they were not deductible and he did not deduct them).

Answer 7

He should make sure to have a copy of it and keep it forever to prove his basis in nondeductible contributions when he withdraws the funds years in the future.

Answer 8

Yes - A tp may open accounts with several financial institutions and split their IRA contibutions between the institutions. They are still limited to max contributions of $7000 yearly (2024) or $8000 if over age 50.

Answer 9

IRA contribution is limited to earned income or $7000 (under age 50) or $8000 (over 50). Jim can make an $8000 contribution to his IRA, and can make a spousal IRA contribution of $6000 to June's IRA. $14000 total earned income less his contribution $8000 leaving $6000 for June's IRA contribution.

Answer 10

1. Rollover to another retirement account (but not a Roth Conversion) 2. A Qualified Charitable Contribution (QCD) using a trustee to trustee transfer. 3. Withdrawl of contribution in same year as contribution. 4. Distributions of nondeductible contributions (rare).

Answer 11

If there's a distribution from an IRA earlier than tp age 59&1/2, then tp must pay tax on the distribution plus a 10% penalty (excise tax) inaddition to the tax.

Answer 12

1. First time home purchase (withdrawl up to $10000 OK) 2. Qualified Education Expenses 3. Death, Total & Perm Disability 4. Emergency Personal Expense (lesser of : a. $1000 or b. Vested IRA balance > $1000 5. Terminal Illness 6. Domestic Abuse Victim (lesser of a. $10000 or b. 50% of IRA acct balance (adj for inflation yrly) 7. Unreimbursed Medical Expense > 7.5% tp's AGI. 8. Health insurance premiums while unemployed 9. Substantilly Equal Periodic Payments (SEPP) over expected life 10. To satisfy an IRS levy. 11. Distributions of a qualfied reservist called to active duty 12. Qualified Disaster Distributions (QDD) 13. Qualified Birth and Adoption Distributions (up to $5000 per bith or adoption)

Answer 13

If a tp repays the distribution within 3 years of the date of distribution they can amend their return an get a refund of tax paid on the distribution. The types of distributions that qualify are; a. emergency personal expense b. terminal illness c. domestic abuse distributions d. qualified birth & adoption e. qualified disaster distributions.

Answer 14

A tp must make his first RMD by April 1, of the year following the year he reaches age 73. If he reaches age 73 on Nov. 15, 2025, he must make his first RMD by April 1, 2026. After the first RMD, he must take his RMD by Dec 31 each year.

Answer 15

The standard penalty is **25%** of the amount by which the required minimum distribution exceeds the amount actually distributed. However, If the required RMD is taken, and IRS Form 5329 is filed, within the "correction window" (generally, **by the end of the second tax year that begins after the year the RMD was due), t**he penalty is reduced to 10%.

Answer 16

The tp could do a "qualified charitable distribution" (QCD)

Answer 17

A tp over age 70&1/2 can contribute up to $105000 (2024) to a qualified charity by the due date of his RMD. It will count as his RMD, and the distribution will be excluded from income.

Answer 18

a. Tp must be over age 70&1/2 b. The distribution must be made by Dec 31 deadline for his RMD. c. The tp's IRA trustee must make the distribution directly to the charity (not from tp to charity) Note: the tp will receive a 1099-R, if filing MFJ the tp's spouse can also do a QCD, the QCD can not be taken as a charitable deduction. The distribution could be from a Roth IRA.

Answer 19

He must recapture those deducted amounts by reducing any potential QCDs made in later years by including them (the deducted contributions) in income.

Answer 20

It depends on if the distribution was qualified or not qualified.

Answer 21

The tp must be age 59&1/2s* and the Roth IRA must have been in existence for 5 years. | * exceptions for disability or death

Answer 22

A tp can withdraw their regular Roth IRA contributions (the basis in their IRA) at any age for any reason with no tax or penalty.

Answer 23

A 10% penalty on the earnings (the basis has already been taxed) | exceptions for death & disability

Answer 24

Tax & penalty free: Tom held the Roth IRA > 5 years, the distribution was made by a beneficiary after the owner of the IRA died.

Answer 25

The IRA funds are transfered directly from one trustee to a new trustee (a trustee to trustee transfer).

Answer 26

In an "indirect IRA rollover" the trustee of the IRA sends a check for the balance in the IRA to the tp. The tp must re deposit those funds into another IRA (or other retirement account) within 60 days to avoid a penalty.

Answer 27

The tp must complete the rollover transaction by the 60th day following the day that they receive the distribution.

Answer 28

An unlimited number of times.

Answer 29

One "indirect IRA rollover" in any 12 month period.

Answer 30

Before 2024 a tp who inherited an IRA (Beneficiary IRA) could take a lump sum distribution from the IRA or stretch the withdrawl of RMDs over their life time. This has changed.

Answer 31

The employer generally withholds 20% of the amount that is a pending transfer in order to pay the taxes due. This is manadtory, and so, if the tp wants to rollover the entire transfer he intends, he will have to add funds from other sources to equal the amount withheld. The tp will get the withheld amount back as a tax credit for the year in which the rollover process is completed.

Answer 32

Use Form 5329 to report penalty exceptions.

Answer 33

For most non-spousal inherited IRAs, the option to strech RMDs is no longer available. The entire balance must be distributed to the beneficiary within ten years after the original owner dies.

Answer 34

Not only must the IRA be fully distributed within ten years, the beneficiary must take annual RMDs over the first 9 years based on their life expectancy.

Answer 35

The following 4 EDBs (Eligible Designated Beneficiary) a. Surviving Spouse b. Disabled Beneficiary c. Minor Child of IRA owner, **NOT** a grandchild. d. A person not more than 10 years younger than the IRA owner.

Answer 36

Surviving Spouse - can: a. Choose to treat the IRA as their own by changing ownership to their name. b. Roll over the IRA into their own current IRA c. Take distributions over their own life expectancy.

Answer 37

They still have the option to stretch RMDs over their life expectancy.

Answer 38

At Age 21: The child is considered to have reached the age of majority for this purpose. Their EDB status ends, and the standard 10-year rule begins. This means the **remaining balance of the inherited IRA must be distributed** entirely by the end of the calendar year that contains the 10th anniversary of the child's 21st birthday (effectively,**by the end of the year they turn 31**).

Answer 39

A roll over of IRA funds from a traditional IRA into a Roth IRA - requires the tp to pay income tax on any previously untaxed amounts in the traditional IRA. | also called a backdoor Roth or backdoor conversion ## Footnote No 10% early withdrawl penalty

Answer 40

NO - with the exception of a spousal IRA - if a **spouse inherits the traditional IRA**from their deceased sps, it **can be converted to a Roth IRA.**

Answer 41

Form 8606 - Nondeductible IRAs

Answer 42

For 2024 the max contribution is lesser of $7000 or earned income. | Max $8000 if over age 50

Answer 43

Yes - Alimony received from divorce agreements dated before 2019 can be used to fund both traditional IRAs and Roth IRAs. | Roth IRA contributions subject to MAGI limits.

Answer 44

They incur a 6% excise tax (a penalty) - that can be avoided if the excess is withdrawn by the due date of the return including extentions.

Answer 45

The 6% penalty will apply every year the excess remains in the account, but will never exceed 6% of the value of the account at the end of the year.

Answer 46

The 6% penalty will continue to apply each year to both the excess contribution and also to the earnings on the contribution.

Answer 47

To avoid a 6% penalty he should recharacterize the contribution by moving the $7000 from the Roth IRA to a traditional IRA. This is a recharacterization, not a rollover, and is permitted to avoid the 6% penalty.

Answer 48

The tp can apply an excess contribution to a later year (permitted recharacterization). | This OK if later yr contributions are still < max allowed

Answer 49

A IRA contribution or rollover can be recharacterized to correct an error, such as an excess contribution or invalid rollover.

Answer 50

It is an "improper use" of an IRA by: a. An owner b. a beneficiary c. a disqualified person (family member or fiduciary)

Answer 51

No - a qualified plan is set up by an employer. However, some IRAs are "considered qualified" plans: IRAs that ARE considered Qualified Plans (for small business/self-employed): SEP-IRAs (Simplified Employee Pension) SIMPLE IRAs (Savings Incentive Match Plan for Employees)

Answer 52

Investing in Collectibles: IRAs are generally restricted from investing in tangible collectibles, which include: a. Works of art, rugs, and antiques. b. Gems and jewelry. c. Stamps and most coins (exceptions exist for certain U.S. minted gold and silver coins). d. Alcoholic beverages and certain other tangible personal property. e. Investing in Life Insurance: IRAs are specifically prohibited from investing in life insurance contracts. f. Sweat Equity: If your IRA owns an asset (like real estate), you or any disqualified person cannot personally perform work (such as renovations, maintenance, or management) on the asset to save money. This is considered providing a service and is a prohibited self-dealing transaction. g. S Corp stock

Answer 53

1. Borrowing Money from Your IRA - including from a SEP or SIMPLE IRA (you can borrow from employer set up qualified plans) 2. Selling Your Personal Property to Your IRA: Your IRA cannot buy assets (like real estate, stocks, etc.) that you personally own or own through a disqualified person. 3. Using the IRA as Security for a Loan 4. Buying Property for Personal Use (Self-Dealing): You cannot use IRA funds to purchase property (like a house, vehicle, or vacation rental) for your or a disqualified person's current or future personal use or benefit. 5. Transacting with Disqualified Persons: This covers general business dealings (selling, exchanging, leasing property, lending money, or furnishing goods/services) between the IRA and a disqualified person. Disqualified persons typically include: a.The IRA owner and their spouse. b. Lineal descendants (children, grandchildren) and their spouses. Ancestors (parents, grandparents). c. The IRA fiduciary, and any entity owned 50% or more by disqualified persons.

Answer 54

A disqualified person is often a close family memeber (or biz owned by a family memeber) - the following are not considered family members: a. in-laws b. cousins c. aunts d. uncles e. siblings f. step-siblings

Answer 55

The entire IRA is generally treated as if it were fully distributed (withdrawn) as of the first day of that tax year. This means the entire fair market value of the account becomes taxable income, and if you are under age 59 & 1/2 you may also face a 10% early withdrawal penalty.

Answer 56

Bcause the FMV of the account on the first day of the year was greater than the basis, he will be taxed on the excess FMV over the basis, which is $100000 taxable income plus a 10% penalty for early withdrawl. Also, his entire IRA account will no longer be treated as an IRA from the date of the withdrawl.

Answer 57

Only the employer makes contributions, the employee is not allowed to make contributions. However, a self-employeed individual can establish and fund a SEP for themselves.

Answer 58

It is a type of account that gives the owner the ability to invest in almost any kind of investment and does not require a financial institution or other kind of custodian.

Answer 59

Who Contributes? **Only your employer can contribute to your SEP-IRA.**You cannot contribute your own salary deferrals (money deducted from your paycheck). Contribution Type (Tax Benefit): Contributions are made with pre-tax dollars (or can be Roth after-tax money if the plan offers it due to SECURE 2.0). The money grows tax-deferred, and you generally pay income tax when you take withdrawals in retirement. Vesting: You are **immediately 100% vested** in all contributions. The money belongs to you right away. Flexibility: Your **employer can choose to skip or change the contribution amount each year,** as long as they contribute the same percentage of compensation for all eligible employees, including you.

Answer 60

Who Contributes? Both you (the **employee) and your employer contribute.** Employee Contribution: You contribute money through payroll deductions (called **"elective deferrals").** Employer Contribution: The employer is required to contribute, typically by either**matching your contribution (up to 3% of your compensation)** or making a non-elective contribution (2% of your compensation) regardless of whether you contribute. Employee Contribution Limits **(2024): You can contribute up to $16,000. If you are age 50 or older, you can contribute an additional $3,500 "catch-up" contribution**. Vesting: You are **immediately 100% vested** in all contributions (both yours and your employer's). *Withdrawal Warning: If you take a withdrawal before you have been participating for two years and before age 59½, the standard 10% early withdrawal penalty increases to 25%.*

Answer 61

Defined Benefit and Defined Contribution

Answer 62

The employee , employer or both may contribute and examples are 401(k) and 403(b) plans.

Answer 63

The lesser of $23000 or tp's compensation. | Add $7500 catch-up if tp > age 50

Answer 64

By the later of: a. By April 1 of the year following the calander year that the tp retires, or b. the year the tp reaches age 73, whichever comes later.

Answer 65

Employee Contribution Limit (Elective Deferrals) For employees under age 50: The limit for elective deferrals (employee contributions, including both pre-tax and Roth 401(k) contributions) is $23,000. For employees age 50 and over: They can make an additional $7,500 "catch-up" contribution. This raises their total elective deferral limit to $30,500 ($23,000 + $7,500). Total Contribution Limit (Annual Additions) This limit applies to the combined total of contributions from both the employee and the employer (including matching and non-elective contributions). Total contributions (Employee + Employer), not including catch-up contributions: **The limit is the lesser of $69,000 or 100% of the employee's compensation.** Total contributions (Employee + Employer), including catch-up contributions (for those age 50 and over): The limit is $76,500 ($69,000 + $7,500 catch-up). Important Note: **The employee's elective deferral limit ($23,000 or $30,500) applies to the total amount an employee can contribute across all 401(k), 403(b), and SIMPLE IRA plans they participate in.**

Answer 66

A is correct. Unlike traditional IRAs, Roth IRAs do not require withdrawls until after the death of the owner.

Answer 67

C is correct. Because she corrected the excess contribution by the filing deadline, there is no penality. The $50 in earnings on the excess contribution must be reported as taxable income in the year the excess contribution was made.

Answer 68

D. A taxpayer cannot use an IRA as collateral for a loan. This would be a prohibited transaction. Generally, a prohibited transaction is the improper use of an IRA by the owner, a beneficiary, or a disqualified person (typically a fiduciary or family member). Prohibited transactions related to an IRA include: Borrowing money from it. Selling property to it. Using it as security for a loan. Buying property for personal use with IRA funds. If a prohibited transaction occurs at any time during the year, the account ceases to be treated as an IRA and its assets are treated as if having been distributed on the first day of the year. **If the total fair market value as of that date is more than the taxpayer’s basis in the IRA, the excess amount is reportable as taxable income.** It may also be subject to the additional 10% tax on early distributions.

Answer 69

d. The sibling of the IRA owner. A disqualified person for purposes of the prohibited transaction rules includes: The *IRA owners immediate family including spouses, ancesters and direct linial decendents, and spouses of those decendents.* The following are **not disqualified persons: Siblings, cousins, aunts, uncles, or step-children.**

Answer 70

Correct Answer Explanation for D: The RMD rules require individuals to take withdrawals from their IRAs (including SIMPLE IRAs and SEP IRAs) every year once they reach age 73 in 2024 or later, even if they're still employed. Note: The age for required minimum distributions increased to 73 because of the changes implemented by the SECURE Act.

Answer 71

D. If the inherited traditional IRA is from anyone other than a deceased spouse, the beneficiary cannot treat it as his or her own. This means that the beneficiary cannot make any contributions to the IRA or roll over any amounts into or out of the inherited IRA. Tim cannot simply leave the money invested indefinitely and avoid withdrawals. As a non-spouse beneficiary, he is subject to the 10-Year Rule, which means the entire inherited IRA balance must be distributed by the end of the 10th year following the year of Jane's death.

Answer 72

Correct Answer Explanation for D: Form 8606 is used to report: Nondeductible contributions to traditional IRAs, and Conversions from traditional IRA, SEP-IRA, or SIMPLE IRAs to a Roth IRA. Failure to file Form 8606 could result in an individual paying income tax and/or an early distribution penalty on amounts that should be tax-free and penalty-free.

Answer 73

B: A checkmark in the IRA/SEP/SIMPLE checkbox in box 7 of Form 1099-R indicates that the taxpayer received an IRA-type distribution. This doesn't necessarily mean that the distribution is taxable (it could be a rollover), but the distribution must be reported on Rosa's return.

Answer 74

C: To find out if a taxpayer's Social Security benefits may be taxable, all of the items listed above are taken into account EXCEPT the exclusion for foreign earned income. In order to calculate the taxable portion of Social Security, you must take one half of your Social Security benefits and add that amount to all your other income, including tax-exempt interest. This number is known as your combined income, and it is compared to the base amounts. If the resulting calculation is less than $25,000 single or $32,000 for MFJ, then your Social Security benefits are generally not taxable.

Answer 75

B: Child support is never taxable to the receiver, so child support is not taken into account when figuring the taxable portion of Social Security. All the other types of income listed, including tax-exempt interest, would be included in the calculation of the taxable portion of Social Security.

IRAs Flashcards

(105 cards)